High First Quarter Costs Don't Change the Outlook for First Majestic Silver Corp

First Majestic Silver's second quarter costs will likely be lower, which will help to offset the decline in silver prices.

May 19, 2014 at 9:46AM

Silver miners continue their battle on costs as low silver prices limit their cash flows. This process does not always go smoothly. For example, First Majestic Silver (NYSE:AG) recently reported first quarter all-in sustaining costs of $18.71 per silver equivalent ounce, far above its own full-year guidance of $15.87-$16.69 per ounce. However, the company is likely to reduce its costs going forward.

Higher costs are likely a one-time event
High costs may put serious pressure on a silver miner in the current price environment. For example, Coeur d'Alene Mines (NYSE:CDE) shares remain under pressure after the company reported first-quarter all-in sustaining costs of $19.12 per silver equivalent ounce. High costs put Coeur d'Alene Mines into a vulnerable position in the event of further silver price downside.

Importantly, First Majestic Silver's first-quarter cost performance is likely a one-time event. The company stated that it anticipates reaching its full-year cost guidance. First Majestic Silver believes that further increases in silver production and cost reductions at its Del Toro mine in Mexico will help it to reach its target. The company stated that it connected the mine to the Mexican national power grid, which allowed it to turn off five out of seven diesel generators and led to lower electrical costs at the mine.

First Majestic Silver's cost performance will be among the best in the industry if the company manages to perform according to its cost guidance. In comparison, Pan American Silver (NASDAQ:PAAS), which reported first quarter all-in sustaining costs of $15.54 per ounce, reiterated its full-year cost guidance of $17-$18 per ounce of silver. The high end of Pan American Silver's cost guidance is quite close to the current silver price, so the company will push hard to reach the low end of its own guidance.

Focus on free cash flow
In its first quarter report, First Majestic Silver stated that cost reductions and treasury growth were the company's top priorities. First Majestic Silver's cash balance declined from $110 million in the first quarter of 2013 to just $41.5 in the first quarter of this year. However, the company has finished a period of heavy spending on the Del Toro and San Martin mines in Mexico. Thus, First Majestic Silver is in a good position to grow its cash, as its capital spending will be limited.

But first, the company should return to producing free cash flow. First Majestic Silver's operational cash flow did not exceed investment spending in the first quarter despite a significant drop in capital expenditures. First quarter operational cash flow was negatively influenced by a combination of low silver prices and higher costs. The company's second-quarter cash flow has a chance to grow, as its second quarter costs will likely be lower. However, second quarter silver prices have been lower versus the first quarter. If the pricing situation does not improve, the drop in costs will likely be offset by the drop in silver prices.

Bottom line
First Majestic Silver's first quarter cost performance should not scare investors, as costs will likely drop as soon as the second quarter. Meanwhile the company's production growth is remarkable. First Majestic Silver produced 3.63 million silver equivalent ounces in the first quarter of this year, while it produced 2.73 million of silver equivalent ounces in the first quarter of 2013. Importantly, the company managed to get this production growth without accumulating significant debt. All in all, First Majestic Silver is a solid producer with possible upside.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!


Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers